Cayman caught between continents over interest rates

Cayman’s financial services may soon be caught in a tug of war between the economic prospects of two continents, and the impact could be felt in a widening spread between interest rates.

On one hand, the United States economic recovery is well underway and the Federal Reserve Board may increase interest rates this spring. But because the Cayman dollar is pegged to the U.S. dollar, it means the price to borrow money here would go up even though the recovery may not be as widespread.

“This disconnect is likely to cause some hurt,” said Samit Ghosh, ICCI Adjunct Professor of Finance, “because unless you live under a rock, you know there are some serious employment issues in the Cayman Islands. People are not feeling rich.”

On the other hand, the recovery among member nations of the European Union is so weak that its central bank is likely to vote Thursday (10 March) to reinforce negative interest rates, taking reserve funds away from commercial banks that are not aggressively lending as a way to stimulate their economy. But Mr. Ghosh says such a move risks undermining the entire traditional banking system as record low interest rates for savings encourages customers to take their chances with peer-to-peer lending and other less regulated instruments.

“In the context of Cayman,” he said, “the hedge funds and private equities which largely use Cayman structures are looking for ways to invest outside of the traditional sources.”